Published 6:35 pm, Sunday, March 9, 2014

Chinese exports plunged 18.1% year-over-year in February, missing expectations for a 7.5% rise. This was down from a 10.6% rise in January.

But what was behind the fall?

"We believe the real situation is not that bad, and could be quite normal, by analyzing two distortions, namely the Lunar New Year (LNY) and fabricated trades last year," Bank of America's Ting Lu wrote in a note to clients.

The impact of the Lunar New Year holiday was expected and Ting thinks frontloading exports, gave the January data a boost.

It's the impact of the inflated trade data from last year which is getting a lot of attention.

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From Ting:

"The other distortion that needs to be adjusted is that exports data were inflated by around 10% in the Jan-Apr 2013 which the comparison base. ...On strong evidence of this distortion is that exports to ASEAN and HK both dropped to 4.8% and -20.9% yoy in Jan-Feb combined from 13.6% and 0.6% in 4Q13. After adjusting for the distortion, yoy export growth in Jan-Feb 2014 combined was about 7% to 8%. Note this is not hindsight as we have mentioned this issue in a number of our previously published research reports including our year-ahead."

Barclays' Jian Chang and Jerry Peng also attributes the slump to the Lunar New Year holiday and the higher base. But, tied to the inflated trade numbers seen last year, they think "the CNY's recent depreciation, starting in 18 February, could have also deterred hot money-related trade activities, further weighing down the y/y growth rate."

UBS' Tao Wang also attributes part of the weakness to the fake data seen last year.

"For example, exports to Hong Kong plunged by 21%y/y, but after adjusting for last year's over-invoicing issue we estimate underlying exports grew a robust 19% y/y," Tao writes. "For overall exports, we estimate that the adjusted growth rate was about 5% y/y in USD," in the Jan-Feb period.

Here's a look at an estimate of fake trade data from Barclays:

Meanwhile, this chart from UBS' Tao Wang, adjusted for invoicing, shows that exports grew about 5%.

But the external environment is soft

Societe Generale's Wei Yao however thinks the correction we saw in February is finally bringing the year-to-date data in line with what we're seeing out of Korea and Taiwan, indicating a "weakened momentum of global demand entering 2014."

"Even if excluding exports to Hong Kong (-20.9% yoy) from calculation so as to adjust for the over-invoicing problem last year, export growth would still have been a meager 2.4%," she writes.

Chang and Peng do think that external demand is still soft. They pointed out that export orders sub-index of the PMI report has been down for three straight months.

Note: We corrected the piece to reflect that Jian Chang and Jerry Peng authored the Barclays note.